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Masonic - small companies don't need their customers to become richer as much as they simply need more customers and to grow.
Originally posted by MatthewAinsworth

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Well if you are basing it on growth in numbers of customers, they are going to be at a disadvantage relative to emerging markets where the growth in consumer numbers is much higher. They may also be at a disadvantage to larger companies who can tap into those growing numbers of overseas customers more easily.

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I don't doubt institutions are aware but I think they are encouraged to be cautious and not overly rewarded for a risk that paid off.

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So you think institutions are going to become less cautious in the future, leading to a rerating of smaller companies? Institutional money is primarily what drives prices, so there needs to be a change in either sentiment or valuation for any mispricing to be exploited.

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I don't expect small cap fees to change but I expect it will remain cheaper than micro or emerging, as the reasons will stay the same

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Where is your evidence that "small cap" companies have lower operating costs than "micro caps" or companies in emerging markets? If you are not expecting these costs to change, why do you expect returns to be any better in the future than they have been in the past?

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Perhaps cape is due to growth over 10 years?

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There will be some aspect of that in CAPE, yes. So it would be expected that faster growing groups of companies would have a higher multiple than larger established companies towards the end of a bull market, which is exactly where we are now. However, over the last 10 years, small caps have not grown their earnings faster than large caps, so the 'E' of CAPE is not being underestimated relative to larger companies in my view.

One can also look at the current CAPE compared with that of the past. The median CAPE since 1978, is 40 for smaller companies, but today it is at an all time high of 56, suggesting smaller companies have not been this expensive at any time in the past ~40 years.

Masonic - I suppose you could say it's a multiple of wealth by number so the needs of the developed market (number) differ from the emerging market (wealth) - a small cap can grow within a country so gain customers without a population increase

I don't think institutions will change, thats just the status quo, but I have read that the rise of indexing is creating more me's

I only mean the cost of running funds is less for small than it is to run a micro fund. I suppose economies of scale apply to running cost though, and micro more in the fail zone

Masonic - I suppose you could say it's a multiple of wealth by number so the needs of the developed market (number) differ from the emerging market (wealth) - a small cap can grow within a country so gain customers without a population increase
Originally posted by MatthewAinsworth

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Small caps, as defined by Vanguard, already have market caps of around Â£1-5bn. They will already be quite established in their home countries. I think you are overestimating untapped growth potential, but then again, that's just my uneducated opinion and you are entitled to hold your own.

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I only mean the cost of running funds is less for small than it is to run a micro fund. I suppose economies of scale apply to running cost though, and micro more in the fail zone

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The Vanguard Global Small Cap index has an expense ratio of 0.38%, whereas the Vanguard Emerging Markets Index has an expense ratio of 0.27% and the iShares Micro-Cap ETF (US listed, but comparable) has an expense ratio of 0.60%. So I do not agree that small cap funds are cheaper to run than micro/EM.

Bowl - I do factor in what you say that the recent performance was not so good, I didn't realise that was happening but I expect times to be worse sometimes, I'm just going for average.
Originally posted by MatthewAinsworth

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What will the average be over the next 50 years for developed market smallcap starting from its highest ever CAPE? You have no clue what it will be, because it is unknown. You can certainly see that there are other areas with excellent opportunities for returns as I mentioned in my post linked above.

If you take the median company in the FTSE global smallcap index it is worth a little over $600m. If it grew 20x in value it would $12bn and ready to leave the smallcap index at the next quarterly update and you would get no more growth from it. If you take the median company in the FTSE global allcap index it is worth a little under $6bn. If it grew to be the largest company, Apple-sized, it would be $730bn which is 125x growth.

So, more growth capacity is available within the mid and largecap indices compared to smallcaps, and the companies can be more financially stable as you get bigger. Those are presumably precisely the reasons you are rejecting microcap and fledgling companies and going for 'small'. But you are unwilling to follow the logic through.

If you look at Amazon, you would have made 4-5x your money while it was in the smallcap index growing from a billion at IPO to $5bn in its early days. After growing and crashing it came back to and left the smallcap index a few times and then eventually left the smallcaps behind, in single digit billions. Today it is around $400bn. Shame you are missing that sort of growth while staying in your smallcap rut.

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I can't get over the power of compounding and I think that that can make a bad ting good,I reassert that because I feel it's underacknowledged - I am stubborn because I'm trying to lay out a theory I have - that compounding can be the most important thing long term

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Every investor on the planet will tell you that compounding is one of the most important things in investing. It is not that you have just chanced upon some miracle that nobody knows about. Even a millennium ago, historians were telling the story of the fellow who told the King that he would like to be paid in grains of wheat: just put one grain of wheat on the first square of the chessboard, two on the second, four on the next, doubling it each time. By the time you get halfway through the chessboard you are laying out over 4 billion grains weighing over 100 tonnes on the 32nd square, and to finish the board they would have needed to find so much wheat that it would weigh several times more than all living things on the planet.

So, compounding is important. But compounding applies to all investments. And the idea that compounding can "make a bad ting good" is just some BS excuse that you are using to avoid taking responsibility for investing in a bad thing. Yes, compounding is great. So, why not apply it to something good in the first place and make it truly great, rather than apply it to something bad and hope it makes it better?

If you have a balanced portfolio you are constantly taking your gains from smallcaps and reinvesting them into emerging markets and taking the gains from emerging markets and investing them into bonds and taking the gains from the bonds and investing them into property and then into midcaps etc etc; with a proper balanced portfolio you are always selling high to buy low as you go back to your sensible planned allocations of x % large, y % small, z% emerging etc etc.

Bowl - that auto market timing aspect of rebalancing has piqued my curiosity, it could work well with some really volatile things assuming it was quick at doing so and commission was negligible. How many % can that contribute on average?

Does it make up for the opportunity cost of not piling into the highest long term total return? They say you can't time the market so I as standard believe the opportunity cost is too much, just going on what they say. It's hard to find something that doesn't correlate but keeps up.

I read that P/e is historically high for everything now, I think it will settle as it's competing with other yielders.

I accept that the mid- large follows more of a company's story, but will many short growth journeys take you further than one big one? Good growth stock is hard enough to find that I read value is better.

Vls 100 as an example of rebalancing in large cap did well in Â£ over 5 years, but not as well as vanguard global small cap, assuming they both reacted to currency changes the same way
Originally posted by MatthewAinsworth

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That's probably not an assumption that should go untested. VLS has significant home bias, whereas the small cap fund does not. You could use VWRL (the ETF) for a more like-for-like comparison.

Bowl - that auto market timing aspect of rebalancing has piqued my curiosity, it could work well with some really volatile things assuming it was quick at doing so and commission was negligible.
Originally posted by MatthewAinsworth

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You don't need to pile into high volatility and do everything quick. You can rebalance once or twice every year or two, over a couple of decades.

Rebalance costs once or twice every year or two are negligible in the context of something as large as your retirement pot. Whereas trying to dodge in and out of volatile funds on a daily or weekly basis will probably be extremely expensive.

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How many % can that contribute on average?

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I did a worked example with a US fund and a EM fund and a UK index rebalanced vs not rebalanced, and got almost a quarter added to the overall pot over 20 years or roughly a percent a year. And that's a quarter extra on the eventual un-rebalanced pot, but it was comfortably over Â£100k extra in absolute terms, when the original investment size was only Â£100k total, so much more than an extra percent a year real terms on your start point.

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Does it make up for the opportunity cost of not piling into the highest long term total return?

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Yes it can.

Firstly because you cannot possibly know what will be the highest long term total return anyway, so picking the highest before it happens is a straight gamble among a lot of choices and on average you will choose one which is not the top one.

Secondly when I did a worked example on this forum with a three-fund portfolio a couple of years ago, over a 20 year period the top fund returned 635% (Â£100k becomes Â£735k), the bottom fund returned about 350% (Â£100k becomes Â£450k), and the average of the three funds - what you would have got just splitting the money three ways and leaving it - returned 487% (Â£100k becomes Â£587k).

The portfolio rebalanced back to an equal three-way split every two years returned 629%, leaving a pot of Â£729k which is over 99% of the value of the Â£735k pot which you'd have got by picking the fund that ended up being the very highest one with the benefit of hindsight, and 24% higher than the 'equal three way split at the start', but untouched )

You can find that thread where I demonstrated 'the power of the rebalance' here:

Read it and you may learn something (which the rest of us have been telling you since last year).

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They say you can't time the market so I as standard believe the opportunity cost is too much, just going on what they say.

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Going on what who says? Most professional investors in the world use balanced portfolios and keep bringing their allocations back to the desired balance. In doing that across asset classes (selling their winners and buying more of the relative underperformers to avoid an over-concentration in certain temporary high performing asset classes) they are naturally selling high and buying low.

So, there is nothing wrong with rotating out of areas in which you are overconcentrated and buying things that are now underrepresented in your portfolio as a result of market movements. It is what most investors do. By contrast, the sort of investors who say "buy one asset class, 'global developed smallcaps with a massive US component', and just hold it while it booms and crashes" are few and far between.

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I read that P/e is historically high for everything now, I think it will settle as it's competing with other yielders.

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So you believe P/E is high and is coming down. Do remind us why you are therefore so keen to pile all of your money into an asset class which has the highest cyclically-adjusted P/E ratio that it has ever reached...

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I accept that the mid- large follows more of a company's story, but will many short growth journeys take you further than one big one?

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Will it, won't it? Quite possibly it won't. Maybe it will. But as you don't know the answer, why are you gambling on one or the other by only using one type of fund?

Smart men say, "I don't know what will happen so I will do a bit of both".

Gamblers who are a little deluded about their own ability say, "I don't know what will happen so I will pile into this one anyway and you can't tell me I'm wrong because you can't know what will happen"

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Good growth stock is hard enough to find that I read value is better.

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The better thing you will have read, if you have read widely, is that each will perform better or worse at different parts of an economic cycle.

However, if what you have read is that value is better than growth, why are you not looking for value stocks across the whole market, instead of focussing on developed world small companies and telling us they are going to grow more.

All of your threads seemed riddled with contradictions as you try to wriggle out of being told you are misguided by saying "ah fair point but I wonder if..." At some point you should accept you are probably not the first person to have had these ideas and wonder why nearly everyone else in the world has done their research and settled on investing 'conventionally' instead of following your innovations.

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Vls 100 did better the last 5 years without the currency factor (and is more UK). Hmm.... ISA definitely, sipp possibly
Originally posted by MatthewAinsworth

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ISA definitely? The majority on one of your other recent threads thought that you shouldn't even be bothering with a stocks and shares ISA when you only have a couple of thousand in your current accounts and regular savers which are available at 5% risk free.

Going on what who says? Most professional investors in the world use balanced portfolios and keep bringing their allocations back to the desired balance. In doing that across asset classes (selling their winners and buying more of the relative underperformers to avoid an over-concentration in certain temporary high performing asset classes) they are naturally buying high and selling low.